Personal Loans

A personal loan is normally for a relatively small amount (often £1,000-£2,000). It is repaid relatively quickly - for example around two years and is typically unsecured, meaning you do not have to risk any collateral to qualify for the loan. Personal loans are often the best option for people who are in a crisis situation in which they need  Read More...

Personal Loans

(Continued) money quickly to solve a financial problem, and cannot acquire it from family, friends or their own savings. In these circumstances, a personal loan is a much less expensive and sensible option than a credit card cash advance.
A personal loan is also preferable to having your car repossessed or your house subject to foreclosure due to missed payments, or facing whatever other crisis you may be confronted with.
For non-crisis situations, personal loans are rarely the best option—though they are still usually more advisable than using credit cards. You should generally only opt for personal loans if you really need the money and cannot get it from your savings, family, 401(K), home loan, or another source that charges less interest - in short, if your only alternative is a credit card.

Personal Loan or Home Loan?

Personal loans are far more expensive than home loans, but there's one advantage of personal loans that should be considered: they're ultimately less risky. Unlike home loans or car loans, personal loans are not normally secured - meaning there usually will be no collateral that the lender can seize if you default.
If you're in a financial crisis now, you have to consider the possibility that your troubles may be compounded by another financial crisis in the future. Therefore if your finances get worse and you cannot pay back your personal loan, at least no one will auction off your house.

How Are Personal Loans Better than Credit Cards?

If you go to a bank and ask for a personal loan, they may try to convince you that a credit card is a better option. But personal loans are probably better for you, because on average you'll end up paying less to the bank. Do your own research and stand your ground if pressured to apply for a credit card instead of a personal loan.

Similarities between Credit Cards and Personal Loans:

• Interest rates tend to be around 10% to 20%.
• Typically unsecured—i.e., you don't have to put up any collateral.
• The amounts of money involved are typically a few thousand pounds or less (and sometimes even less than £250).

Advantages of Personal Loans over Credit Cards:

Personal loans have a fixed repayment period, with a pay-off date you can plan ahead for. You could of course force yourself to pay off your credit cards within a fixed period, but with a loan, the repayment period is based on a contract, rather than your own will power, so payoff success rates are much, much higher.

Credit cards have a revolving line of credit. Personal loans are installment loans, like mortgages. When you make a payment you do not suddenly free up an equivalent amount of credit you can charge against. This is another reason why, practically speaking, the average person is likely to end up getting out of debt faster with a loan.

Personal loans have a set interest rate that cannot normally be raised willy-nilly at the whim of the lender. Credit issuers often raise the interest rates of customers who approach their credit limits - another reason the banks usually prefer giving out credit.

How to get a personal loan if you have bad credit history

If you have bad credit history, you will have a hard time getting a personal loan at a competitive interest rate. Of course, having had trouble with credit in the past may be a particularly good reason to avoid personal loans in the first place but if you have no other choice, and are confident you can make the payments, here are some tips.

• Try a credit union. Not only are they usually less expensive, they are often more forgiving.
• Go to your own bank. If you can't go to a credit union, you could try getting a loan from your own bank. If you have a good record with them, they may be more likely to oblige. Of course, few banks actually advertise personal loans, and some really do not offer them, but it can't hurt to ask.
• Offer some collateral. While personal loans are generally unsecured, a good loan officer may be able to help you borrow against property, an insurance policy, or other asset. Obviously collateral makes it all the more urgent you pay off this loan.
• Get a guarantor. This is yet more risky than offering collateral though. You stand to lose not just an asset but your relationship with a friend or loved one if you default, but if your problem with credit really was just a fluke, and your prospects for repaying the loan are very good, it may be worth the risk. Just don't take it personally if your friends or relatives reject your request - after all, they have a lot more to lose than a bank.
• Don't apply for multiple loans all at once because you may look desperate and lose your chance of getting any of them. Getting rejected for a loan will of course also hurt your chances of getting approved for a subsequent one, since it will raise a red flag. The only solution is to conduct your own research, communicate with the loan officers, and then apply for the loan you have the best chance of getting.

In the end, the best advice about personals might be not to get one unless you absolutely have no other choice except credit cards. If a personal loan really is your best option, make sure to follow all the tips above when researching where to go.

Return to Top